Using Your FSA Money Wisely

Health flexible spending accounts (FSA) allow you to pay for out of pocket health care costs with pretax dollars. An FSA is typically a bank account that offers a debit card or checks you can use to make purchases or reimburse yourself for qualified costs. Unfortunately, this benefit has to be offered by your employer in order to use it.

The Benefit Of An FSA

In 2018, you could contribute up to $2,650. This limit was raised to $2,700 for 2019. If you’re able to contribute to this type of account and are chasing financial independence, it offers a chance to improve your finances, potentially by 1%. If you’re in the 24 percent marginal tax bracket and contribute $2,700 in 2019, that’d save you $648 in federal income tax. That's free money! **U

Use It Or Lose It**

You’ll only save money if you actually use the funds in your FSA. Unfortunately, FSA funds are considered "use it or lose it", unlike health savings accounts (HSA). If there is a balance in your FSA at the end of the year, you give up that balance. Some employers allow you to roll over up to $500 in unused money, but they don’t have to. Others may offer up to a two and a half month grace period to use remaining funds. If you’re going to use an FSA, make sure you know your employer’s rules and have a plan for how to use the money you contribute. So what exactly can you spend your FSA dollars on to make sure you don’t lose the money at the end of the year? Here are the current eligible expenses to help you plan how much to set aside in an FSA next year. This list can also inspire you of ways you can use the remaining balance that doesn’t qualify to be rolled over before you lose it.

Qualified Medical Expenses For An FSA account

FSAs allow you to use the money in the account for qualified medical expenses. Sadly, they don’t allow just any medical expense. Instead, expenses are limited to what your particular FSA plan allows. These expenses must also meet the requirements of medical or dental expenses as defined in IRS publication 502. The list is extremely long and detailed, so we’ve listed the highlights below. Check out IRS publication 502 for a complete list, starting on page five. - Acupuncture

• Ambulance services
• Artificial limbs
• Artificial teeth
• Bandages and other similar medical supplies
• Birth control pills
• Body Scans
• Breast pumps and supplies
• Capital expenses such as special equipment installed in your home if their main purpose is for medical care for you, your spouse or dependent (See IRS Publication 502 for details.)
• Chiropractor
• Contact lenses needed for medical reasons
• Crutches
• Dental treatment for prevention and alleviation of dental disease
• Diagnostic services
• Drug addiction therapy
• Eye exams
• Eyeglasses
• Eye surgery
• Fertility enhancement
• Guide dog or service animals
• Hearing aids
• Lab fees
• Lead-based paint removal to prevent a child who has or had lead poisoning from eating the paint (See IRS publication 502 for details.)
• Lodging, including meals, if the primary reason for the lodging is medical care
• Medicines (see below)
• Nursing services
• Operations
• Oxygen
• Physical examinations
• Pregnancy test kit
• Psychiatric care
• Psychoanalysis
• Psychologist
• Sterilization
• Stop-smoking programs
• Surgery
• Therapy
• Transplants
• Transportation (See IRS publication 502 for details.)
• Wheelchair
• X-rays

You can claim medicine as a qualified expense, but only if - It requires a prescription

• It is available without a prescription (basically, an over the counter drug) and you get a prescription for it or
• It is insulin.

In addition to meeting the definition of a medical expense, your expenses must be incurred by: - You

• Your spouse
• Any dependents you claim on your tax return
• Your children under age 27 or
• Any person you could have claimed on your tax return except that the person,
  • Filed a joint tax return
  • Had a gross income of $4,050 or more or
  • You or your spouse could be claimed as a dependent on someone else’s tax return.

In most cases, the list your plan allows and the IRS Publication 502 should be aligned. However, you should double-check to make sure your plan hasn’t disallowed any particular expenses. Finally, make sure the expenses are incurred during the coverage period. **Related: Choosing Your Health Insurance: A Guide For Open Enrollment**Specifically Disallowed Expenses

Specifically for FSAs, you can’t claim health insurance premiums, long-term care coverage or expenses and amounts covered under another health plan as medical expenses. The IRS also has a list of particular expenses that aren’t considered medical expenses for general deductions including FSAs. They include: - Babysitting for a normal healthy baby

• Controlled substances that are illegal under federal law even if legalized by state law
• Cosmetic surgery (in most cases)
• Dancing lessons
• Diaper service
• Funeral expenses
• Hair removal
• Hair transplant
• Health club dues
• Household help for non-nursing services
• Illegal operations or treatment
• Maternity clothes
• Medicine from other countries
• Nutritional supplements
• Swimming lessons
• Teeth whitening
• Veterinary fees

Use Your FSA To Reach Financial Independence A Little Faster

FSAs are another way to save a bit on your federal income tax bill. Combined with other strategies, you can significantly reduce your federal income tax bill and use that money to help speed up your journey to financial independence.

Related Articles

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• How To Lower Your Healthcare Costs
• Triple Tax Benefits Of The HSA